FAQ’s: A Guide for Small Business
Excerpts from the Federal Trade Commission
Internet Advertising
Is advertising on the Internet subject to the same laws as other advertising?
Yes. Ad claims on the Internet must be truthful and substantiated. Visit Advertising and Marketing on the Internet: The Rules of the Road for more information. Dot Com Disclosures offers special guidance for online advertisers regarding how to make sure that any disclaimers and disclosures in online ads are clear and conspicuous. It addresses ‘Net specific issues such as banner ads, pop-up windows, scrolling, hyperlinks, etc. Internet marketers also should be aware that the FTC’s Mail or Telephone Order Merchandise Rule (“Mail Order Rule”) applies to online transactions. For specific guidance on complying with the Mail Order Rule online, ask the FTC for a copy of Selling on the Internet: Prompt Delivery Rules, as well as A Business Guide to the Federal Trade Commission’s Mail or Telephone Order Merchandise Rule.
My website is attracting visitors from outside the United States. What do I need to know?
Because the World Wide Web is, as its name implies, worldwide, even small online businesses can reach customers around the globe. Electronic Commerce: Selling Internationally – A Guide for Business discusses some online commerce guidelines endorsed by the United States government and 28 other countries.
What do I need to know about consumer privacy online?
Advertisers should be aware of the privacy issues raised by Internet marketing. For more information about recent FTC Reports to Congress on consumer privacy on the Internet, visit the FTC’s website (www.ftc.gov). Basically, the FTC strongly encourages companies to implement four fair information practices: giving consumers notice of a website’s information practices; offering consumers choice as to how their personally identifying information is used; providing consumers with access to the information collected about them; and ensuring the security of the information collected. In addition, companies need to know about the Children’s Online Privacy Protection Act and the rule that implements it. The law requires websites to obtain verifiable parental consent before collecting, using, or disclosing personal information from children, including their names, home addresses, email addresses, or hobbies. For more information, ask the FTC for How to Comply with the Children’s Online Privacy Protection Rule.
Mail Order Advertising
What rules must a company follow if it sells products via mail order?
Truth-in-advertising standards – including that companies must have proof to back up express and implied claims made about its products – apply to mail order marketers. In addition, the FTC’s Mail or Telephone Order Merchandise Rule (“Mail Order Rule”) applies when a consumer places an order by mail, telephone, fax, or computer. Under the Rule, a company must have a reasonable basis for believing that it can ship the product within the time period stated in the ad. If the ad doesn’t specify a time period, the company must have a reasonable basis for believing that it can ship within 30 days. The Mail Order Rule applies equally to online marketers. For more information, ask the FTC for A Business Guide to the Federal Trade Commission’s Mail or Telephone Order Merchandise Rule and A Business Checklist for Direct Marketers. Companies that advertise online also should get a copy of Selling on the Internet: Prompt Delivery Rules. In addition, the Direct Marketing Association, a trade group for members of the direct marketing industry, has voluntary guidelines on ethical business practices.
Is it okay for a company to “dry test” a product?
“Dry testing” describes the practice of placing an ad for a product to see if there is sufficient consumer interest before actually going to the expense of manufacturing the item. Although the Mail Order Rule doesn’t specifically deal with this situation, the FTC has issued an advisory opinion that such ads must clearly disclose to consumers the fact that the merchandise is only planned and may not ever be shipped. For more information, ask the FTC for A Business Guide to the Federal Trade Commission’s Mail or Telephone Order Merchandise Rule.
GENERAL ADVERTISING POLICIES
What truth-in-advertising rules apply to advertisers?
Under the Federal Trade Commission Act:
* Advertising must be truthful and non-deceptive;
* Advertisers must have evidence to back up their claims; and
* Advertisements cannot be unfair.
Additional laws apply to ads for specialized products like consumer leases, credit, 900 telephone numbers, and products sold through mail order or telephone sales. And every state has consumer protection laws that govern ads running in that state.
What makes an advertisement deceptive?
According to the FTC’s Deception Policy Statement, an ad is deceptive if it contains a statement – or omits information – that:
* Is likely to mislead consumers acting reasonably under the circumstances; and
* Is “material” – that is, important to a consumer’s decision to buy or use the product.
What makes an advertisement unfair?
According to the Federal Trade Commission Act and the FTC’s Unfairness Policy Statement, an ad or business practice is unfair if:
* it causes or is likely to cause substantial consumer injury which a consumer could not reasonably avoid; and
* it is not outweighed by the benefit to consumers.
How does the FTC determine if an ad is deceptive?
A typical inquiry follows these steps:
*The FTC looks at the ad from the point of view of the “reasonable consumer” – the typical person looking at the ad. Rather than focusing on certain words, the FTC looks at the ad in context – words, phrases, and pictures -ÿto determine what it conveys to consumers.
*The FTC looks at both “express” and “implied” claims. An express claim is literally made in the ad. For example, “ABC Mouthwash prevents colds” is an express claim that the product will prevent colds. An implied claim is one made indirectly or by inference. “ABC Mouthwash kills the germs that cause colds” contains an implied claim that the product will prevent colds. Although the ad doesn’t literally say that the product prevents colds, it would be reasonable for a consumer to conclude from the statement “kills the germs that cause colds” that the product will prevent colds. Under the law, advertisers must have proof to back up express and implied claims that consumers take from an ad.
*The FTC looks at what the ad does not say – that is, if the failure to include information leaves consumers with a misimpression about the product. For example, if a company advertised a collection of books, the ad would be deceptive if it did not disclose that consumers actually would receive abridged versions of the books.
*The FTC looks at whether the claim would be “material” – that is, important to a consumer’s decision to buy or use the product. Examples of material claims are representations about a product’s performance, features, safety, price, or effectiveness.
*The FTC looks at whether the advertiser has sufficient evidence to support the claims in the ad. The law requires that advertisers have proof before the ad runs.
What kind of evidence must a company have to support the claims in its ads?
Before a company runs an ad, it has to have a “reasonable basis” for the claims. A “reasonable basis” means objective evidence that supports the claim. The kind of evidence depends on the claim. At a minimum, an advertiser must have the level of evidence that it says it has. For example, the statement “Two out of three doctors recommend ABC Pain Reliever” must be supported by a reliable survey to that effect. If the ad isn’t specific, the FTC looks at several factors to determine what level of proof is necessary, including what experts in the field think is needed to support the claim. In most cases, ads that make health or safety claims must be supported by “competent and reliable scientific evidence” – tests, studies, or other scientific evidence that has been evaluated by people qualified to review it. In addition, any tests or studies must be conducted using methods that experts in the field accept as accurate.
Are letters from satisfied customers sufficient to substantiate a claim?
No. Statements from satisfied customers usually are not sufficient to support a health or safety claim or any other claim that requires objective evaluation.
My company offers a money-back guarantee. Very few people have ever asked for their money back. Must we still have proof to support our advertising claims?
Yes. Offering a money-back guarantee is not a substitute for substantiation. Advertisers still must have proof to support their claims.
What kind of advertising claims does the FTC focus on?
The FTC pays closest attention to:
* Ads that make claims about health or safety, such as:
ABC Sunscreen will reduce the risk of skin cancer.
ABC Water Filters remove harmful chemicals from tap water.
ABC Chainsaw’s safety latch reduces the risk of injury.
* Ads that make claims that consumers would have trouble evaluating for themselves, such as:
ABC Refrigerators will reduce your energy costs by 25%.
ABC Gasoline decreases engine wear.
ABC Hairspray is safe for the ozone.
Ads that make subjective claims or claims that consumers can judge for themselves (for example, “ABC Cola tastes great”) receive less attention from the FTC.
How does the FTC decide what cases to bring?
The FTC weighs several factors, including:
* FTC jurisdiction. Although the FTC has jurisdiction over ads for most products and services, Congress has given other government agencies the authority to investigate advertising by airlines, banks, insurance companies, common carriers, and companies that sell securities and commodities.
* The geographic scope of the advertising campaign. The FTC concentrates on national advertising and usually refers local matters to state, county, or city agencies.
* The extent to which an ad represents a pattern of deception, rather than an individual dispute between a consumer and a business or a dispute between two competitors. State or local consumer protection agencies or private groups such as the Better Business Bureau (BBB) often are in a better position to resolve disputes involving local businesses or local advertising. To get the address and phone number of your state Attorney General’s office, your local consumer agency, or the nearest BBB, check your telephone directory.
* The amount of injury – to consumers’ health, safety, or wallets – that could result if consumers rely on the deceptive claim. The FTC concentrates on cases that could affect consumers’ health or safety (for example, deceptive health claims for foods or over-the-counter drugs) or cases that result in widespread economic injury.
What penalties can be imposed against a company that runs a false or deceptive ad?
The penalties depend on the nature of the violation. The remedies that the FTC or the courts have imposed include:
* Cease and desist orders. These legally-binding orders require companies to stop running the deceptive ad or engaging in the deceptive practice, to have substantiation for claims in future ads, to report periodically to FTC staff about the substantiation they have for claims in new ads, and to pay a fine of $11,000 per day per ad if the company violates the law in the future.
* Civil penalties, consumer redress and other monetary remedies. Civil penalties range from thousands of dollars to millions of dollars, depending on the nature of the violation. Sometimes advertisers have been ordered to give full or partial refunds to all consumers who bought the product.
* Corrective advertising, disclosures and other informational remedies. Advertisers have been required to take out new ads to correct the misinformation conveyed in the original ad, notify purchasers about deceptive claims in ads, include specific disclosures in future ads, or provide other information to consumers.
Will the FTC review my company’s ads before they run to make sure that we’ve complied with the law?
FTC staff cannot clear your ads in advance. However, there is guidance to help you comply with the law. Information about advertising particular kinds of products (for example, foods, dietary supplements, or “environmentally friendly” merchandise), advertising credit, and guidelines for advertising on the Internet is available at www.ftc.gov. For more general information on advertising policies, call the FTC’s Division of Advertising Practices at 202-326-3090.
How can I keep up-to-date on what’s going on at the FTC?
The Federal Trade Commission website (www.ftc.gov) is updated almost every day, so bookmark it for instant access to FTC news and views, including recent enforcement actions, speeches, public hearings, and other business information. Before running an ad, check out what the FTC has had to say about products or advertising claims similar to yours. From the homepage, you can search the entire FTC website using key words or phrases. For example, a search using the word “diet” will yield cases, reports, news releases, and other materials related to FTC policies about the advertising of diet products and services. In addition, you can visit www.consumer.gov for consumer and business information from the FTC, FDA, SEC, and other federal agencies. You also may want to check with the Better Business Bureau for tips on truthful advertising, the BBB’s voluntary Code of Advertising, and information about scams targeting small businesses.
How does the FTC address the needs of small businesses?
In its continuing commitment to regulatory reform, the FTC has repealed almost 50% of its trade regulation rules and has streamlined and simplified remaining rules. The FTC’s Small Business Compliance Assistance Policy Statement describes other forms of assistance available to small businesses to help them comply with truth-in-advertising laws. For example, the Business Guidance section of the FTC’s website (www.ftc.gov) includes an expanding library of materials written especially for small businesses. Small businesses also may contact the FTC headquarters or one of the FTC’s regional offices with specific inquiries about how to comply with the law. In addition, one of the FTC’s top law enforcement priorities is fighting fraudulent and deceptive practices aimed at small businesses. The agency has taken the lead in challenging deceptive invention promotion services, questionable franchise opportunities, bogus office supply scams, and other practices that prey on aspiring entrepreneurs.
What can my company do if a competitor is running an ad that I think is deceptive?
You can:
* Explore your legal options under federal and state statutes that protect businesses from unfair competition. For example, the Lanham Act gives companies the right to sue their competitors for making deceptive claims in ads.
* File a complaint with the National Advertising Division (NAD) of the Council of Better Business Bureaus, if your competitor’s ad is running nationally or regionally. The NAD is a private, self-regulatory group affiliated with the BBB. It investigates allegations of deceptive advertising and gives advertisers a mechanism for resolving disputes voluntarily.
* Call your local BBB or file an online complaint with the Better Business Bureau if the ad is local. Many BBBs have procedures for resolving disputes between businesses.
* Contact the radio station, television station, or publication where the ad ran. Let them know that they’re running an ad you think may be deceptive.
* Contact your state Attorney General’s Office or your city, county, or state Office of Consumer Affairs. To get their phone numbers, check your telephone directory.
* Contact the FTC. By mail: Federal Trade Commission, Consumer Response Center, 600 Pennsylvania Avenue, NW, Washington, DC 20580; by telephone: toll-free 1-877-FTC-HELP.
If my company files a complaint about a competitor with the FTC, will the FTC resolve the dispute?
The FTC is authorized to act when it appears that a company’s advertising is deceptive and when FTC action is in the public interest. Although the FTC cannot intervene in an individual dispute between two companies, the agency relies on many sources – including complaints from consumers and competitors – to find out about ads that may be deceptive. To file a complaint against a competitor who you believe has engaged in false advertising, contact:
Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580
Toll-free 1-877-FTC-HELP (382-4357)
Online Complaint Form
If my company files a complaint against a competitor with the FTC, will we be kept informed about the status of any investigation?
No. The FTC keeps investigations confidential. Matters become public only after the FTC reaches a settlement with a company or files a lawsuit. However, you can be assured that complaints received from companies alleging that competitors are advertising deceptively are reviewed carefully.
Can I find out if the FTC already has an investigation against a company?
The FTC can tell you if it has already taken formal action (e.g., filed or settled a lawsuit) against a particular company or against similar kinds of advertisements or products. But the FTC cannot disclose whether an investigation is going on. To find out if a company or product has been the subject of a recent FTC action, search the FTC’s website (www.ftc.gov).
OTHER ADVERTISING ISSUES
Advertising Agencies
Are advertising agencies subject to the FTC Act?
Yes. In addition to the advertiser, the advertising agency also may be held legally responsible for misleading claims in ads. Advertising agencies have a duty to make an independent check on the information used to substantiate ad claims. They may not rely on an advertiser’s assurance that the claims are substantiated. In determining whether an ad agency should be held liable, the FTC looks at:
* The extent of the agency’s participation in the preparation of the challenged ad; and
* Whether the agency knew or should have known that the ad included false or deceptive claims.
How does the FTC define “bait and switch” advertising?
It’s illegal to advertise a product when the company has no intention of selling that item, but instead plans to sell a consumer something else, usually at a higher price. For more information, ask the FTC for its Guides Against Bait Advertising.
Children’s Advertising
What standards does the FTC apply when evaluating claims in ads aimed at children?
The FTC pays particular attention to ads aimed at children because children may be more vulnerable to certain kinds of deception. Advertising directed to children is evaluated from a child’s point of view, not an adult’s. The FTC also works with the Children’s Advertising Review Unit (CARU) of the Council of Better Business Bureaus. CARU is a private, self-regulatory group affiliated with the BBB that publishes self-regulatory guides for children’s advertising.
My company is thinking about doing a website for kids. Are there any issues involving children and the Internet that we hould be aware of?
The Children’s Online Privacy Protection Act, a federal law that requires websites to obtain verifiable parental consent before collecting, using, or disclosing personal information from children, including their names, home addresses, email addresses, or hobbies. The FTC has issued a rule outlining the procedures for commercial websites to use in obtaining parental consent. The rule applies to operators of commercial websites and online services directed to children under 13, and general audience sites that know that they are collecting personal information from a child. For more information, ask the FTC for How to Comply with the Children’s Online Privacy Protection Rule. Visit the FTC’s website (www.ftc.gov/kidzprivacy) for more information about how to protect kids’ privacy online.
Clothing and Textiles
Contests and Sweepstakes
Are there any rules about ads for contests or sweepstakes?
Sweepstakes-type promotions that require a purchase by participants are illegal in the United States. Other agencies, including the United States Postal Service (USPS) and the Federal Communications Commission (FCC), also enforce federal laws governing contests and prize promotions. And each state has laws that may require promoters to make disclosures, seek licensing, or post a bond. Since state laws vary, check with the Attorney General’s Office in the state(s) in which you plan to advertise. If a contest or promotion involves telephone calls, the FTC’s Telemarketing Sales Rule requires specific disclosures, such as the odds of winning a prize, how to participate without buying anything, and that no purchase or payment is required to win. If pay-per-call services are involved, the FTC’s 900 Number Rule requires certain disclosures. For more information, ask the FTC for the publications Complying with the Telemarketing Sales Rule and Complying with the 900 Number Rule.
Credit
What information must be included in ads for consumer credit?
According to the Truth in Lending Act and other federal and state laws, ads for consumer credit must include certain disclosures about the terms and conditions of credit. These laws specifically require the disclosures to be “clear and conspicuous” so that reasonable consumers can read (or hear) and understand the information.
Disclosures and Disclaimers
Does FTC law specify how disclaimers or disclosures must appear in ads?
Some laws and regulations enforced by the FTC, such as the 900 Number Rule, the Truth in Lending Act, and the Consumer Leasing Act, have specific requirements that apply to advertising, including that certain information must be “clearly and conspicuously” disclosed. For more information, ask the FTC for the publications Complying with the 900
What about disclaimers and disclosures online?
Regardless of whether you advertise on TV or radio, in print ads, through direct mail or online, the law is the same: disclaimers and disclosures must be “clear and conspicuous.” Dot Com Disclosures offers special guidance for online advertisers regarding ‘Net specific issues such as banner ads, pop-up windows, scrolling, hyperlinks, etc.
“Free” Claims and Rebate Offers
When can a company advertise something as “free”?
When a “free” offer is tied to the purchase of another product, the price of the purchased product should not be increased from its regular price. For more information, ask the FTC for the Guides Concerning Use of the Word “Free” and Other Representations and the Guides Against Deceptive Pricing. In addition, if you’re advertising a product as “free” or offering it at a low cost in conjunction with the purchase of another item, the ad should clearly and conspicuously disclose the terms and conditions of the offer. Disclose the most important information – like the terms affecting the cost of the offer – near the advertised price. For more information, ask the FTC for Big Print. Little Print. What’s the Deal? You also may want to check with the Attorney General’s office in the state(s) where you plan to advertise. In addition, the Better Business Bureau has voluntary standards for when something can be advertised as “free.”
What are the rules on advertising rebates to consumers?
Ads that include rebate promotions should prominently state the before-rebate cost, as well as the amount of the rebate. Only then will consumers know their actual out-of-pocket cost and have the information they need to comparison shop. Rebate promotions also should clearly disclose any additional terms and conditions that consumers need to know, including the key terms of any purchase requirements, additional fees, and when consumers can expect to receive their rebate. The FTC’s brochure Big Print. Little Print. What’s the Deal? outlines other factors advertisers should bear in mind when making rebate promotions.
Guarantees
When a company advertises that products are sold with a guarantee or warranty, what information about the terms and conditions must be included in the ads?
If an ad mentions that a product comes with a guarantee or warranty, the ad should clearly disclose how consumers can get the details. Any conditions or limits on the guarantee or warranty (such as a time limit or a requirement that the consumer return the product) also must be clearly disclosed in the ad. Finally, the law requires companies to make copies of any warranties available to consumers before the sale. This applies to retail sales, sales by phone or mail, and online transactions. For more information, ask the FTC for the Guides for the Advertising of Warranties and Guarantees.
Negative Option Offers
Are there any rules regarding ads for “negative option” plans?
The FTC’s Negative Option Rule applies to sellers of subscription plans who ship merchandise like books or compact discs to consumers who have agreed in advance to become subscribers. The Rule requires that ads clearly and conspicuously disclose material information about the terms of the plan. Further, once consumers agree to enroll, the company must notify them before shipping to allow them to decline the merchandise. Even if an automatic shipment or continuity program doesn’t fall within the specifics of the Negative Option Rule, companies should be careful to clearly disclose the terms and conditions of the plan before billing consumers or charging their credit cards. For more information, ask the FTC for the Negative Option Rule.
“New” Claims
When can a company advertise a product as “new”?
The answer depends on how the ad uses the word “new.” For example, under the rules governing the identification of textiles, fabric cannot be advertised as “new” if it has been reclaimed or respun. The rules governing advertising claims for tires prohibit the use of the word “new” to describe retreads. However, when no specific regulation applies, each case must be considered within the context of the ad. At least one FTC advisory opinion has suggested a six-month limit on the use of the word when advertising the introduction of a “new” product not previously on the market.
Pricing
Are there any standards governing the advertising of prices?
The same standards for truthfulness apply when companies make claims about price comparisons, “sale” prices, and the like. For more information, ask the FTC for the Guides Against Deceptive Pricing. Since many pricing issues involve local practices, you also may want to contact the Attorney General’s office in the state(s) where you plan to advertise.
What responsibility does a company have to make sure that prices are accurate?
In many jurisdictions, companies are legally required to charge no more than the advertised or shelf price for a product, so good pricing practices are important for both customer satisfaction and a company’s bottom line.
Sales
When may a company advertise that a product is “on sale”?
The same standards for truthfulness apply when a company makes advertising claims about sale prices or products being “on sale.” For more information, ask the FTC for the Guides Against Deceptive Pricing. Since this issue often involves local practices, you may also want to contact the Attorney General’s office in the state(s) where you plan to advertise.
When can a company advertise a “going out of business sale”?
The short answer is: only when a store is going out of business. It would be deceptive to advertise a “going out of business sale” when a store is not going out of business. If a store in your area is advertising what looks to be a bogus “going out of business sale,” contact your state Attorney General’s office.
Subliminal Advertising
Is it legal to use subliminal advertising techniques?
It would be deceptive for marketers to embed ads with so-called subliminal messages that could affect consumer behavior. However, most consumer behavior experts have concluded that such methods aren’t effective.
Endorsements and Testimonials
Are there any rules on how endorsements may be used in ads?
The FTC’s Guides Concerning the Use of Testimonials and Endorsements offer practical advice on endorsements by consumers, celebrities, and experts. All endorsements must reflect the honest experience or opinion of the endorser. Endorsements may not contain representations that would be deceptive, or could not be substantiated, if the advertiser made them directly.
* Endorsements by consumersmust reflect the typical experience of consumers who use the product, not the experience of just a few satisfied customers. If an endorsement doesn’t reflect users’ typical experience, the ad must clearly disclose either what consumers can expect their results to be or the limited applicability of the endorser’s experience. Saying “Not all consumers will get these results” or “Your results may vary” is not enough.
* Endorsements by celebrities must reflect the celebrity’s honest experience or opinion. If the endorsement represents that the celebrity uses the product, that celebrity actually must use the product. Once a celebrity (or expert) has endorsed a product, the advertiser has an obligation to make sure the endorsement continues to reflect the endorser’s opinion.
* To give an expert endorsement, a person must have sufficient qualifications to be considered an expert in the field. But just being an expert isn’t enough. Expert endorsements must be supported by an actual evaluation, examination, or testing of the product that other experts in the field normally would conduct to support the conclusions in the endorsement.
* Advertisers also must disclose any material connection between a person endorsing a product and the company selling the product. A “material connection” is defined as a relationship that might affect the weight or credibility of the endorsement. For example, if an endorser is an employee or relative of the advertiser, that fact must be disclosed because it is relevant to how much weight a consumer would give to the endorsement. Similarly, an advertiser must disclose if a consumer has been paid for giving an endorsement.